Ethics of Management 7th Edition

Hosmer Solutions Manual

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Ethics of Management 7th Edition Hosmer Solutions Manual

Teaching Notes for Chapter I – The Nature of Moral Problems in Business Management

The basic argument in this chapter is that moral problems are not moral because a
respected moral authority says that they are. They are moral because some people are
benefited while others are harmed by a given decision or action, or some people have
their rights respected while others have their rights ignored. It is this conflict between
benefits and harms, between rights respected and rights ignored, that generates the special
conditions of a moral problem. And it is this conflict between benefits and harms,
between rights and wrongs that make these moral problems so difficult to resolve. How
do you decide if the benefits to some are large enough to overcome the harms to others,
or if the rights of some are important enough to ignore the rights of others? People do get
harmed in this world, and rights are ignored all too frequently. How does one decide on
what is the best or proper thing to do, or convince others to reduce the harms and
recognize the rights. The graphic below is the process for solution proposed within this
text:

Understand all Determine the

Moral Standards Economic Outcomes

Define Complete Consider the Propose

Convincing
Moral Problems Legal Requirements Moral Solution

Recognize all Evaluate the

Moral Impacts Ethical Duties

For the first three to four class sessions I draw out this graphic on the board, so
that it is clear, and then I use that graphic to guide, not to force, the class discussion of the
cases. I also draw out on the board the other graphic that was printed in Chapter I, on the
determination of individual moral standards. I want to continually emphasize during the
discussion of the cases that all of us differ in our moral outlooks for perfectly good and
legitimate reasons:

Religious/Cultural
Traditions

Personal Goals
Personal Norms Subjective Standards
Personal Beliefs of Moral Behavior
Personal Values

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 Economic/Social
Situations

This, and the other teaching notes on the chapters in the text, will follow the same
format with 1) assignment questions, 2) start-up methods, 3) discussion issues, and 4) an
analytical outline for each of the subsequent cases:

1. Assignment questions. I do not use assignment questions for the chapter readings
because I find that they are generally ignored in the students’ preparation. You may
have better luck than I with those questions, so here are some that I think would focus
attention on the major issues in Chapter 1:

What does “right” really mean? How do you know when something is truly
“right” or totally “wrong”?

Why do people’s views on what is “right” and “wrong” differ? Why would an
unemployed sawmill worker in northern California feel differently about cutting
old growth forests than a young lawyer, working in San Francisco, who enjoys
hiking in the Sierras?

How do you attempt to convince people who disagree with you about what is
“right”? What arguments should that unemployed sawmill worker make if he/she
were at a meeting with the young lawyer? What counter arguments should the
lawyer make?

2. Start-up methods. I also do not go over the material in the text during the class,
except in the form of a short “mini-lecture” at the end, because I find that class
repetition generally detracts from student preparation. “Why read this material
carefully tonight if we’re going to talk about it throughout the class tomorrow?”
seems to be the prevalent attitude. Instead, I move directly onto the discussion of the
cases.

An alternative, however (and this is not a bad choice), is to start the discussion by
bringing into class an ethical issue that is currently in the news. Now, I realize that
any example I mention in this teaching note will soon appear to be dated, but in the
summer of 2010, while I was writing these notes, a good example of a well-
publicized moral issue (this one, however, is probably not going to seem old and
dated) was the Gulf oil spill. Don’t try to address the whole issue that you select from
a newspaper. Just pick a part of it. For example – if the oil spill were still in the
news – should BP compensate the owners of hotels and motels along the coast for lost
tourist revenue if oil had not come destructively ashore on their particular beaches,
but vacationers had not come to the area because they were worried about that
possibility?

Another alternative, and sometimes this works even better, is to inform your class
that you would be glad to have anyone who finds what he or she thinks is an

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 interesting moral problem in a newspaper or on the internet to present that problem to
the class provided a) it does not have any religious or ethnic implications; and b) the
alleged facts can easily be checked.

3. Discussion issues. As explained previously, I generally do not start the early classes
in the course by talking about assignment questions or by bringing up current topics
(although I would be tempted even during the early part of the term to bring up
something as serious as the Gulf oil spill). Instead, when teaching I usually went
directly to the case or cases, but with a difference. First, I would call upon one or two
students to “set the stage” (that is to describe the situation) for the case we were next
going to discuss. As explained earlier in the “General Suggestions” portion of this
teaching note, in the section dealing with the Syllabus, I sometimes assigned two
short cases rather than one, but divided up responsibility for those cases between the
front and the back halves of the classroom, or the right and left sides. I liked to pack
lots of material into the class time, and to provide plenty of opportunities for small or
large group meetings. Before breaking up into those groups I would ask individual
students, whom I called upon at random, to describe the situation described in the
case. I found that it was necessary, particularly during the early going in the term, to
call upon students at the start of each class to ensure adequate preparation, and also I
wanted to have all of the groups – if I was going to break the class into groups that
day – to start from the same set of understood facts.

I described the use of these “in-class” and “break out” groups in the earlier
“General Suggestions” of this Teachers’ Guide, and won’t repeat those comments
here. Let me just add that both types of groups seemed to work very well. They give
each member of the class an opportunity to express his or her opinion under
conditions that are less imposing for many than having to speak in front of the full
class, and of course they break up the time and provide an opportunity for students to
meet other students and listen to other opinions. And lastly, my major argument is
that it is necessary to learn how to present a convincing ethical recommendation; that
takes practice and the groups provide greater opportunities for practice.

Also as mentioned previously in the “General Suggestions” section of this

Teacher’s Guide, I generally try to save ten minutes at the end of each class session to
present a summary of what I thought were some of the good points raised in the
discussion,(with a compliment to the student who brought up that particular issue) or
some of the important topics from the text that had been ignored (though I try not to
do this in a complaining mode; instead I say something like “Here is something you
may want to consider next time”).

The theme of these last ten minute mini-lectures is “This is what I hope you
learned from this class.” At the end I try to relate that learning to the next
assignment, saying “Look at this next case or next chapter from this point of view,”
and quit. I always try to quit 5 minutes early, partially to give me time to prepare for
the next class but primarily to give students an opportunity to think about the issues
that have been raised. Probably most of them do not use that time to think about

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 those issues, but some do and that – in my view – makes it worthwhile. Now, on to
the cases:

Condominium Owners vs. Condominium Employees

(1st of the Three Short Cases for Chapter I)

1. Who is benefited and who is harmed. This at first glance seems pretty
straightforward. The 273 condominium unit owners benefit from the savings of
$35,000 per year, while the cleaning service employees suffer from the loss their jobs.
It might be noted, however, that those savings amount to just $128 per unit
($35,000/273 units). It also might be noted that the total loss to the unionized
employees who are to be replaced by non-union workers is considerable greater in
total than that $35,000 savings to the owners as the workers lose their wages until
they are able to find other employment, which may take a while given that the case
stresses the period of economic downturn.

2. Whose rights are recognized and whose are ignored? This is the non-straightforward
part of this short case. Employment in the United States is legally at the “will of the
employer”, so the condominium owners do indeed have a right to fire the employees.
And, it can be assumed that this firing will take place at the end of the union contract
period, so the employees do not have a lawful claim. But, do employees gain a right
to a job if they do that job to the satisfaction of the employer over a number of years?
Many workers believe strongly that they do gain that right after they’ve done their
best over time.

3. State the perceived moral problem “Is it right to fire employees who have performed
well over a number of years in order to gain cost savings for the employer that will be
considerably smaller in total than expected wage losses to the employees?”

4. Determine the economic outcomes. There clearly is a competitive market for

apartment and condominium cleaning employees in New York City, and all the
condominium owners in this instance have done is to meet that competitive wage
level. It has to be admitted that, theoretically, this is more economically efficient as
long as the external costs imposed upon the fired workers are included.

5. Consider the legal requirements. As explained above, employment within the United
States is legally at the will of the employer and, if the firing does indeed take place at
the end of the duration of the union contract, it would appear that the employees have
no legal claim.

6. Evaluate the ethical duties. I like this case because it provides a rejoinder to the all-
too-frequently expressed “It it’s profitable and it’s legal, do it!” claim. Here there are
ethical duties that seem relevant to me:
 Personal virtues. Would any of the condominium owners feel boastfully proud in
telling his/her friends over a beer at a tavern (or iced tea at a restaurant) “I voted

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 to fire all of the condominium cleaning workers, who had been doing satisfactory
work –I certainly had no complaints – to save myself $128 per year”?
 Religious injunctions. The question here is whether this firing treats the
discharged workers with kindness and compassion, and whether it builds a sense
of community between the workers and the owners.
 Universal rules. If it is right for the condominium owners to fire the
condominium workers with no complaints about past performance, just to save
relatively small amounts of money, then according to Kant it has to be right for
the employers of those condominium owners to fire them, regardless of their past
work history, also to save small amounts of money.
 Distributive justice. The condominium cleaning employees are clearly the “least
amongst us” in this combined group of owners and workers.
 Contributive liberty. This is a bit of a stretch, but probably there are some of
those cleaning employees who are going to night school, attempting to improve
their skills and thus their lot in life.

7. Propose convincing moral solution. I don’t think that I ought to provide my preferred
solution for a moral problem in any of these teaching notes. My suggestion is that at
the end of class you express your thoughts, and the reasons behind your decision, as
clearly as you can, then attempt to clear up any uncertainties that surfaced during the
discussion, compliment the students who expressed their views clearly, whether you
agree with them or not, ask if there are any questions, and then move on.

Motel Rates After Hurricane Katrina

nd
(2 of the Three Short Cases for Chapter I)

I expect to use the structured 7-point form of analysis for each of the teaching
notes because I believe that it will be easier and quicker to read, but that does not mean
that I recommend that you follow this structured method in each of the class discussions.
That is, I would not inevitably ask the first member of the class I called upon, “Who was
benefited and who was harmed?

I think that this case is particularly well suited for a “start-at-the-end” approach.
You could explain to the class that one of the clerks at the motel essentially lost her job --
although it is true that she first quit voluntarily, but then was fired when she wanted to
return to work– for having said, “That’s not treating people right”.

Then you could ask for volunteers, for members of the class who agreed that
raising rates on people who were forced to seek shelter because their homes had been
badly damaged or destroyed, was “not treating people right”. Following that explanation
you could suggest that those volunteers assume that: a) they were not clerks but instead
were management trainees at that motel; b) that this motel was part of a large resort
chain, not a small single ownership unit; and c) that this was a job that they felt had great
future prospects, and that they really wanted to keep. In short, they should assume that
their classmates at the college or university from which they had graduated considered
that they had gotten a “real plum” job that would eventually lead to well-paid, high

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responsibility positions and pleasant lives in pleasant resort locations. Given those
assumptions, how would they have responded to the instructions to double the rates?
Would they have said, “That’s not treating people right”?

Lastly, to give the person you called upon some time to think, I suggest that you
conclude by saying that a large part of this course is going to be on how to do what you
think is right without getting fired. Ask volunteers and non-volunteers alike to write out
their opening sentence to the headquarters person who called you and said, “Raise the
rates to the seasonal limit”. Call on a number of people. Write their opening sentences
on the board. Have the class vote on the best one, and record the voting scores next to
each entry. When discussion runs down, compliment the people who did volunteer, say
that you realize that it is very hard for them to think fast on their feet, but that this is a
skill that everyone has to learn, and that you appreciate their willingness to try. All that
will get you more volunteers next time. Now, on to the analysis:

1. Who is benefited and who is harmed? Clearly the motel owner was benefited by
doubling the rates after the hurricane, and equally clearly the hurricane refugees who
were forced to flee after their homes were badly damaged or destroyed were the ones
who were harmed.

2. Whose rights are recognized and whose are ignored? The motel owner clearly has a
right to set prices, as long as those prices are not legally exploitive, and here that
particular issue of legality seems resolved because the higher rates that are now to be
charged were set as “standard” a year earlier, though for seasonal demand rather than
emergency need. You might explain in class that here is an example of the difference
between demand and need in marketing terms. The hurricane survivors, who have
that need, clearly have a right not to be exploited, but the legal difference between
pricing in response to market demand and pricing to take advantage of consumer need
is going to be difficult to establish in a courtroom.

3. Define the perceived moral problem. This moral problem can be expressed very
simply in my view: “Is it right for the motel owner to apply seasonal demand pricing
to an emergency need market?”

4. Determine the economic outcome. The economic theory that market demand versus
market supply establishes equitable pricing is normally both relevant and rigorous,
but what happens when the customer utility function changes from “I want that” to “I
and my family need that”? The theoretical response would be that this then becomes
a public policy issue, and that either new laws should be passed or emergency shelters
be provided by the local government. But, usually there just isn’t enough time.

5. Consider the legal requirements. My understanding is that most travel based services
– particularly hotels, motels and airlines – have standard published rates for periods
of high demand, and then discounts off those standard rates that are not published and
that vary with vacancy availability and customer insistency. This constantly varying
pricing policy has irritated many non-insistent customers for years, but so far as I

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 know it is practiced widely and is not illegal. If you have time, ask your students to
consider if they were legislators and if they felt that the raising of rates in this case
was wrong:: a) how they would write the law so that hotels and motels would not be
able to raise their rates during an emergency; and b) how they would ensure passage
of that law by convincing other legislators that it truly was needed.

6. Evaluate the ethical duties. Here again – similar to the first case in this series -- is a
situation in which the Pareto Optimal economic outcome may be efficient because the
rooms will all be rented regardless of the doubled price and the customers who
refused to pay that doubled price did have the option to purchase, so they should not
complain. But, it also possible to look at that increased charge as an external cost
imposed upon the hurricane refugees without their consent, which does lessen the
economic efficiency argument. The legal requirements don’t appear to be precise
enough or current enough to prevent the motel owner from seizing that profit
opportunity. Here again, in my view, is a situation where the ethical duties appear to
be more relevant:
 Long-term interests. Higher rates during emergencies are bound to irritate many
people, but that has not in the past appeared to deter future customers. And, in
this instance, people who have lost their homes probably aren’t going to be future
customers.
 Personal virtues. This one does seem applicable. No motel managers would want
to be heard proudly boasting, “Boy, we made buckets of money when we
hammered those poor families feeling Hurricane Katrina by doubling our rates”
 Religious injunctions. This is another that seems applicable. Certainly raising
rates on families who have lost their homes shows little compassion or kindness,
and it creates no sense of community, of people working jointly towards a
common goal. .
 Universal duties. If it is right for hotel or motel managers to raise rates for
customers who come up to their front desks in needful situations, then it has to be
right for hospitals and medical practitioners to raise rates on patients – maybe
members of the motel owner’s family, who come to an emergency room in similar
situations
 Distributive justice. Members of a family who have just lost their home and
much of their property to hurricane winds have to be viewed as the “least amongst
us”, and as such deserve not to be harmed.

One last point you might raise in your “summarize and quit early” end of class
comments would be to ask whether a management trainee who, when told to double the
rates, said, “Sure, we can get that done within the next 10 minutes” would avoid any
damage to his or her career. You might suggest to your students that if the motel chain
was sued, either by the Attorney General of the state in which it was located for price
gouging, or by an aggressive trial lawyer representing families forced to pay the higher
rates, and if there were a jury trial which would be easy for the resort chain to lose,
frequently blame is pushed down upon the lower levels of management. “They did that,
not us, and we got rid of them” is a public relations ploy frequently used by large
companies.

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 Citigroup and the $100 Million Bonus
(3rd of the Three Short Cases for Chapter I)

I would suggest that you start the discussion of this case by essentially reading the
assignment question, and then call upon someone to say what he or she would do, and
why.

Mr. Hall has a valid contract, and he did earn a very substantial profit for the
company at which he works. But that company has been subsidized by a cash
payment of $45 billion and a credit pledge of $335 billion, both of which
essentially come from U.S. taxpayers, most of whom have never earned more
than $50,000/ year in their lives. Should the $100 million bonus be paid to Mr.
Hall this year? Assume that you are a consultant on executive compensation, and
have been asked to advise members of the board of directors of Citigroup. What
would you say?. Remember, you should be prepared to logically convince the
members of that board.

1. Who is benefited and who is harmed?. Those benefited are Mr. Hall and his
associates and staff members at Philbro, and they benefit very substantially. Those
harmed are the taxpayers of the country, but they are harmed almost anonymously.
Unlike the cleaning staff at the condominium in the 1st case or the hurricane survivors
at the motel in the 2nd, they’re not a small group of people who have been graphically
harmed by the actions of others. Instead, taxpayers are such a huge group – just about
everybody in the country – and they’ve been harmed – if indeed it is right to think
about the use of governmental funding to support the parent firm of Philbro as a harm
to taxpayers– very indirectly. Certainly, Mr. Hall, his associates and staff did nothing
themselves – as far as is known – that brought harm to any individual taxpayer or
group of taxpayers.

But, and this is the important issue that has to be remembered, if $45 billion in
governmental funds had not been awarded to Citigroup, the corporate owner of
Philbro, and if $301 billion of government assistance (90% of the total toxic mortgage
portfolio held by Citigroup) had not been pledged to Citigroup, then Philbro would
have been forced into bankruptcy along with all the rest of Citigroup. Philbro, as one
of the prime assets still held by Citigroup, would have been sold to the highest bidder
with all of their energy trading strategies, energy trading contacts and computerized
trading programs intact. That highest bidder might or might not have wanted to retain
Mr. Hall, his associates and staff given that the successful bidder already had all of
the information that Mr. Hall, his associates, staff and predecessors had developed
over a lengthy period of time. The most basic question in this case is: Was it the
collection of personal trading skills that enabled Philbro to earn so much money, or
was it the range of corporate trading strategies, contacts and programs? The skills, or
course, could walk out the door if the bonuses were not paid; the strategies, contacts
and programs could not legally be taken on that journey to the nearest available
abandoned Connecticut dairy farm. The highest bidder doubtless would institute

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 criminal liability claims if it could be shown that those strategies, contacts and
programs were indeed taken without permission by the former employees.

This is a side issue, but my understanding is that many of the non-physical and
non-financial assets of divisions or subsidiaries that are different from those in the
main firm, such as the complex computer programs and digital data bases in this
instance, are often keep off-site in a leased storage bank by many of the division or
subsidiary managers on a “just in case” basis. If you have time at the end of class,
ask member of your class whether they would do this, whether in their view this was
outright theft or sensible precaution?

If I were teaching this class I would not explain the possible consequences of the
bankruptcy of a parent firm upon the employees of a profitable subsidiary until after a
considerable number of students had expressed their views that a) Mr. Hall and the
other employees at Philbro had made large profits for Citigroup; b) that Mr. Hall and
the other employees had valid contracts that promised them large bonuses as a
percentage of those profits; and c) that those contracted bonuses should rightfully be
paid.

But, once the consequences of Citigroup bankruptcy come up, then the question
becomes, “Do Mr. Hall and the others have a responsibility to the taxpayers who
enabled Citigroup to avoid that bankruptcy, that would have had dire consequences to
Philbro and themselves, to now help in the repayment of the $45 billion in
government funds and the reduction of the $301 billion federal guarantees

2. Whose rights are recognized and whose are ignored? Mr. Hall and the others did not
abuse anyone’s rights, as far as is known, while they were successfully conducting
their energy trading strategies. But now the question is whether the taxpayers have a
right for the profits of that trading to be used repay some of the $45 billion in TARP
funds that were advanced – in cash – to Citigroup, and also for some reduction of the
$301 billion in federal guarantees of the toxic securities issued by Citigroup. The
major issue in the case is whose rights takes precedence, and which party has a duty
to observe those primary rights?

3. Define the perceived moral problem. Should Citigroup pay the cash bonuses that
were fully earned by the executives, managers and staff members at Philbro, and
legally owed to them by the terms of their employment contracts, or should those
funds be used to repay the cash advances and to reduce the credit guarantees that
were the essential funds that permitted Philbro to continue operating as a wholly
owned, highly profitable and independently managed subsidiary of Citigroup?

4. Determine the economic outcomes. Pareto Optimal efficiency considerations just

don’t seem to be relevant here. The $45 billion cash advance and the $301 billion
credit support were provided on an emergency basis, not as part of a market
exchange, to prevent the bankruptcy of Citigroup that would have severely
constrained Philbro and sharply reduced its earning potential. The emergency

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 negotiations, however, did not include any specific provisions relative to Philbro, nor
to its executives, managers and staff. Those executives, managers and staff may or
may not have had a personal duty to help repay the cash advances and the credit
guarantees that keep them operating, but economic theory does not look at personal
duties in business management; it only considers financial outcomes and legal
requirements.

5. Consider the legal requirements. As part of the emergency investment of taxpayer

funds there doubtless were provisions for Citigroup to repay the cash advance and
reduce the credit exposure, but doubtless also there was no extension of those
provisions to Philbro, a wholly owned but independently managed subsidiary that got
lost in the chaos. In short, legal requirements don’t seem to be relevant here either,
because they simply don’t exist, beyond the contractual obligations for Citigroup to
pay the earned bonuses that were negotiated years before the narrowly avoided
bankruptcy.

6. Evaluate the ethical duties. A duty, in ethical terms, is a perceived obligation to take
actions that will benefit either other individuals or the full society, and that perception
is based upon various universal principles that have been developed over time. The
problem is that many of these seem to lose their power of logical conviction among
the recipients of large cash payments. But, remember here the decision on bonus
payment is to be made by the board members at Citigroup, not by the recipients at
Philbro::
 Long-term interests. It would be in the long-term interests of Citigroup to repay
the advances and reduce the guarantees as quickly as possible in order to maintain
the confidence of governmental agencies and regulatory officials for the future.
 Personal virtues. It would be in the reputational interests of Citigroup to repay the
advances and reduce the guarantees in order to restore confidence in their
intention of acting with openness, honesty and pride among the public. .
 Religious injunctions. Compassion and kindness aren’t issues here, but building a
sense of community, of everyone working jointly for a common goal, certainly is.
This favors debt repayments to the government over bonus payments to
executives.
 Government requirements. The law, due to the hurried negotiations during the
emergency allocation of funds, does not say anything about the repayment from
the profits of subsidiaries; it is, however, specific about the payment of
contractual bonuses.
 Utilitarian benefits. This principle is only about the margin of benefits over
harms that is generated by a given decision or action. The rule is to always pick
the alternative with the largest margin; it is not concerned with the distribution or
use of that margin.
 Universal rules. This principle is only concerned with the judgment of the
rightness or wrongness of a single action; it cannot be used to compare two
actions unless one were clearly universalizable and the other not. Both are
universalizable here.

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  Distributive justice. The least amongst us in this situation are clearly the
taxpayers, not the executives, managers and staff who are to receive large cash
bonuses. Repayment of the debt would be favored over payment of the bonuses.

This is a case in which probably neither of the two solutions – pay the executive
bonuses or repay the federal advances -- will achieve a unanimity of opinion in any
group. My suggestion is that you put on the blackboard three options – pay, pay half and
half, don’t pay – and take a vote. Then end the discussion by asking members of your
class to assume that they had been skilled enough or lucky enough to be hired by Philbro
as a management trainee. What, if any, duties would they feel they owned to Citigroup,
the corporate owner of Philbro? What do the answers you probably will receive to that
question mean for the management of highly skilled and highly profitable corporate
subsidiaries located in a different city or town from the main corporate offices?

Bernard Madoff and the Largest Financial Scam in History

This is a very different case from the three shorter ones that preceded it. Those all
focus on the question, “What is the right thing to do?” Here the wrong thing has already
been done, on a massive $65 billion scale. My suggestion is that you focus the class
discussion on the why and how it happened, and on the lessons that should be learned
from that why and how. That is, my suggestion is that you follow the assignment
question, and that you start each section of the class by reading the relevant question:

1. Why in your opinion did Bernard Madoff do this? He had been exceedingly
successful in the electronic exchange trading that he had started and that his firm
continued, and he had clearly achieved both wealth and stature. What was it that
drove him, again in your view, “off the cliff”? What does this say about human
character? What does this say about the nature and/or culture of the investment
community? There are a number of points to be discussed here:

People differ greatly in their goals, norms, beliefs and values. The text says that
these differences are derived from their cultural and religious traditions and their and
economic and social situations, but something more basis is sometimes, not often,
involved. That something more basic can be described in very non-scientific terms as
“a main spring that is wound much tighter than anyone else’s”. People have quirks of
personality and evidently for Bernard enough just wasn’t enough.

Maybe this desire for more money, yachts, homes, dinners, positions and
associates (I won’t say “friends” because it appears that he didn’t have friends, he had
victims) came from the very easy early stages of his career, in which nothing ever
went wrong. Maybe it came from the very innovative ideas he had and the highly
risky actions he took during those early stages: his founding of a securities firm with
an investment of just $5,000; his positioning of that small firm as a middleman
between large institutional traders; his automation of the trading function at his firm
to reduce costs; his transformation of the Cincinnati Stock Exchange into the

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 automated NASDAQ. Maybe he felt that he was owed more because of those
innovative ideas and high risks.

But, more likely in my view, is that Bernard was one of those people who just
wanted more. I would suggest that you end this section of the class by asking
students the very direct question, “How do you know when enough is enough, how do
you know when to stop?” Students won’t talk about personal goals in class,
particularly when those goals involve wealth, but after a few tenuous comments you
might say “Think about this ‘what do you want out of life’ issue as you leave the
class today. Always striving for more can destroy a person’s life. It destroyed
Bernie’s”. .

2. Why was it so easy for Bernard Madoff to raise so much money? The case describes
a “network of trust and an aura of probity”. How does a person build a network of
trust and aura of probity while running a dishonest operation? Give some thought
here. It may help you to avoid a similar situation in the future.

Bernard Madoff’s early success, which was both innovatively and honestly
earned, doubtless laid the foundation for his later exploitation of investors. People
look at an individual’s past accomplishments, or lack of accomplishments, and expect
the same trends of success or failure to continue, without sudden changes. People are
impressed by wealth and position, particularly if neither is ostentatiously exhibited
but more quietly and privately enjoyed. People of similar cultural backgrounds and
religious affiliations tend to feel part of a group, particularly if that group has
experienced some unwarranted opposition in the past, and group attitudes that “we’ll
all stick together” and “we can trust each other“ frequently develop. And lastly, the
quiet marketing and apparent exclusivity, in my view, played a major role. Potential
investors couldn’t just mail a check to Madoff Corporate Headquarters; they had to be
introduced to him, or be represented by a “feeder” organization and knew him.

3. The Wall Street Journal (August 20th, 2009, p. B5) published three articles on the
lessons that business schools should teach and business students should take away
from the financial meltdown that had occurred. The huge Madoff investment losses
were part of that meltdown. What are the lessons that you think are important from
the Madoff investment fraud as part of that overall meltdown?

My suggestion here is that you assign a group of three to four students to prepare
a 20-minute report on the lessons that business school students should draw firstly
from the financial meltdown, and then from the Madoff financial scam. Classes, in
my experience, always seemed to go better if the class time was broken into sections,
and those sections should not just have different topics but different participants and
different activities. One of my rules was that the group presentation would be graded,
but also that members of the listening audience could get a good mark for class
participation if they were among the first to ask relevant and challenging questions.

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4. What would you have done differently had you been: a) an advisor to a charitable
organization that was investing substantial funds through Madoff; b) a member of a
well-paid feeder fund that was collecting smaller amounts from middle income
investors for transfer to Madoff; or c) a competitor who had reported to the SEC that
the investment model Madoff was using was incapable of generating such large and
consistent returns, but seen little or no response?

Certainly the advisors to charitable organizations and the executives in the feeder
funds had a duty to perform due diligence, which would have included understanding
the investment model. None did, but that was probably caused by a lack of
understanding of the complex hedge fund techniques, and by a natural refusal by
Bernard Madoff to explain those techniques. If asked, he would probably have said,
“Oh, I wish I could tell you how we do things, but if our methods become known then
our returns are going to vanish, so I’m afraid that we have a very strict policy on
secrecy”.

The lack of follow-up by the SEC is, unfortunately, all too familiar. You might
ask your class why financial regulation never seems to work as well as it should. The
answers, once more in my opinion, are: a) the complex methods that are poorly
understood; b) the advanced techniques that are constantly changing; c) the out-of-
date status of the laws that never seem to keep up; and d) the alleged intention of
many regulators to switch sides and become a regulatee for the higher incomes and
better positions that would bring.

Lead Paint on Children’s Toys: Who Was Responsible?

I am going to start this teaching note by preparing the standard 7 step analytical
frame work recommended in the text. None of the assignment questions specifically
mention a need for this framework, but hopefully your students – even at this early point
in the course – understand that if a beginning level manager is going to make a
difference, and be noticed approvingly by the senior level executives for raising
important issues in a competent way, it is necessary to logically convince most of the
other people involved in a given situation. The given situation in this instance is the
probable poisoning of pre-school children, and that certainly is a critical matter for a
business firm.

1. Understand the different standards. The people in the value chain come from
different economic and social positions and – once the Chinese manufacturers are
included -- difference cultural and religious traditions as well:
 National media companies. Television production, particularly for a pre-school
children’s audience, is a very inventive business. To succeed, you have to invent
characters that have human traits but not human forms. Managers in this business
tend not to think in typical managerial terms about revenues, costs and profits; a
show is either a hit, and then the revenues are big enough to cover the costs and
generate profits, or it isn’t, in which case it’s back to search for a popular theme
with believable characters.

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  Toy marketing firms. These are the entrepreneurial managers in this value chain.
They’re looking for something new, but here it is for new business opportunities,
not for new cartoon characters. They do worry about revenues and costs because
they are caught between the media firms and the retail chains that have the power
to demand royalties and to set prices.
 Foreign manufacturing companies. The owners and managers at the Chinese
manufacturing companies are the ones who feel the cost and delivery pressures.
Low skill and high volume manufacturing in China must be a very competitive
business in which profits depend upon minor cost savings in material purchases
and small increases in labor outputs. My understanding is that the owners and
managers tend to be very inventive & demanding at both.
 Large retail chains. All four of the participants in this children’s toy value chain
have very different business models and strategic advantages. High volume
retailing is a world unto itself; the strategic success factors are demand forecasting
and costs negotiating. Retailers who are good at both tend to be very profitable;
those who are not tend to be acquired or go out of business
 Conclusion. Can you imagine a meeting of all four of the participants in this
consolidated global value chain? They all have different business models, success
factors and competitive worries, and therefore they probably all have different
moral standards of behavior. In any meeting there would be a lot of talking past
each other, and arguing about minor points. It would be very hard to reach a
group consensus.

2. Recognize the varying impacts.

 Benefits go to the national media companies and to the large retail chains in
approximately equal amounts, and then to the toy marketing firms in the middle
and the Chinese manufacturing companies down at the bottom.
 Harms go to the employees at the foreign manufacturing firms who are pressured
to work harder and longer in poor conditions, and to the purchasers of the toys
whose children can be hurt by cost saving decisions and actions throughout the
chain.
 Rights to use their strategic positions to set prices are recognized for the three
domestic companies; the Chinese manufacturers have essentially been left out.
 Rights to product safety and to full knowledge about the product have been
denied to the parents who purchased the toys; rights to health have been denied to
their children.

3. State the perceived moral problem. “Is it right to market popular and appealing
wooden toys manufactured under high cost and time pressures to the parents of pre-
school children without inspecting those toys for any loose parts, sharp edges or
chemical coatings that could harm those children?”

4. Determine the economic outcomes. The desired economic efficiency and its expected
societal benefit of more goods produced for fewer resources consumed could not have
been achieved here because: a) the customers were not fully informed (would parents
have bought the toys if large signs had been posted over the display counters saying

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 “These toys have not been inspected for possible dangers to your child”); and b) the
external costs of those dangers were not fully included in the pricing. Given the
difficulties of detecting physical and mental developmental problems in young
children, and then of connecting those problems to the ingestion of lead, it probably
was not possible to estimate those external costs.

5. Consider the legal requirements. It was very definitely against the law in the United
States and Western Europe for products of any type to be sold if they had been coated
with lead paint, and it was said to be illegal in China for lead paint to be used but it
was also acknowledged that this law was seldom enforced. However, inspection of
products imported from China for lead paint and other harmful defects was not
required by law.

6. Evaluate the ethical duties. The moral arguments against selling toys that might (due
to the lack of inspection) be coated with lead paint appear compelling
 Long term self-interests. The large numbers of wooden toys that were being sold
and the vulnerability of the children who were playing with those toys created a
potential for huge legal claims. Civil law suits against the toy marketers did
follow the Consumer Product Safety Commission’s recall order, but there were
settlements rather than trials, and those settlements were closed (not available for
viewing by non-participants) so it is not known how much money was paid to the
afflicted children and their parents.
 Personal virtues. No managers at one of the toy marketers could possibly feel
pride in seeing headlines in newspapers and stories on newscasts about the lead
on children’s toys. The problem in the existing value chain was that managers at
the media companies and at the retail chains could always say, “Oh, that’s not our
fault’ the importers should have checked for lead”.
 Religious injunctions. There was little compassion and kindness in importing
toys for children without inspecting for harmful conditions, and no sense of
community, of all four participants within the value chain working for a common
good.
 Government requirements. The right to life, and consequently to health, takes
precedence in Locke’s expansion of Hobbes’ initial proposal over the right to own
and ability to trade property.
 Utilitarian benefits. It would be difficult, as mentioned above, to compute the
cost to society of the potential harm to the mental and physical development of
preschool children caused by the ingestion of lead on toys. But, that lack of
accurate estimation of the costs would not legitimatize any possible claim that the
production and marketing of the toys resulted in an overall greater good than
harm for the society.
 Universal duties. If it was thought to be right not to inspect for lead on children’s
toys, then it has to be right not to inspect for lead on any products sold to a large
market base.
 Distributive justice. Preschool children whose physical and mental health is being
put at risk by the sale of non-inspected toys are clearly the least amongst us.

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Ethics of Management 7th Edition Hosmer Solutions Manual

 Contributive liberty. Preschool children whose physical and mental health is

being put at risk are also being prevented from developing their abilities to the
fullest.

Now, we will move on to the assignment questions at the end of the case. I
assume that the answers here are reasonably clear following the explanations above:

1. Why did RC2 and Mattel not set up import inspection programs? Those companies
were required, by U.S. law, to inspect the factory operations of the contractors who
made the toys for oppressive labor practices, but not the toys themselves for possible
safety defects. Unfortunately, new protective laws are generally written only to cover
already disclosed personal and environmental problems; there is little foresight
amongst legislators. And, the executives at RC2 and Mattel doubtless felt that they
had purchase contracts with specific provisions forbidding the use of lead paint, and
did not consider the possibility that the Chinese manufacturers, under growing cost
pressures and with different standards of behavior, might disregard those provisions.

2. Who should bear the costs of the lead paint inspection program? Ideally all four
members of the value chain should share in the cost. Ideally again, just as with
market expansion and cost control, it should be a united effort. But, due to their
pricing power and their relative isolation from either harm or blame, it is likely that
both the national media companies and the large retail chains would refuse to
participate, essentially telling the marketing specialist firms “It’s your problem, not
ours”. So the question becomes one of convincing the executives at those marketing
specialists to bear the costs; this might be easier if it were understood that specific
fines of considerable size could be levied against the Chinese manufacturers for each
detected violation.

3. Are there good alternatives to an inspection program? Inspecting what someone else
has already done is markedly inefficient; it would be much better to get it done right
the first time. The “fines of considerable size” mentioned above might help, but that
still requires inspection. How does one get an unshakeable agreement – that is, one
with no inspection needed – from people of different goals, norms, beliefs and values
that are locally viewed as perfectly valid? It is difficult, particularly when one is
pressing those people for concessions on costs. Maybe the best way to start would be
to stop pressing for concessions, and to agree on a set profit percentage, difficult as
that would be to compute and to verify.

4. What changed in the children’s toy industry that brought about this harm? In my
view, it was the substantial increase in competitive intensity and the division of
managerial responsibility among the different stages in the value chain. Everyone
was competing against everyone else for a greater share of the profits within that
value, and no one felt responsibility for non-obvious defects in product, customer,
and environmental safety.

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